Global Overview Compares Different Approaches, Impact on Real Estate

For more information, contact:
Trisha Riggs at 1-202/624-7086; [email protected]

LONDON (March 10, 2010) – Government intervention in different countries to shore up ailing financial institutions is having mixed success in reviving their respective economies and real estate markets, according to Too Big to Fail, a new report from the Urban Land Institute’s (ULI) Europe office. A common sentiment is that an industry recovery will hinge on the extent to which any immediate boost from the aid ultimately results in steady, predictable flows of private capital to real estate.

The report, released today, assesses different forms of government intervention implemented since the fall of 2008 in the United Kingdom, Ireland, Germany, Italy, The Netherlands, France, Spain, the United States and Japan, including the impact on the real estate market in those countries.

The need for such massive, near-simultaneous aid by so many governments to stave off financial industry collapse shows how globalized and interconnected capital markets have become over the past two decades, said ULI Europe President William P. Kistler. “The global financial crisis demonstrated that not only is no financial firm too big or too resilient to fail, but that financial firms have become so big that failure would be catastrophic for the world economy. Banks are not too big to fail, but they are too big to be allowed to fail,” Kistler said.

ULI is a global research and education institute devoted to responsible land use; ULI Europe, based in London, serves the Institute’s 2,300-plus members in Europe. Too Big to Fail was commissioned by the ULI Europe Policy and Practice Committee and is the result of a series of interviews with 50 ULI members and their contacts around the globe.

The intervention schemes examined by the report generally fall into three categories:

• Recapitalizations — government injections of cash into banks in return for common shares, preferred shares, warrants, subordinated debt, mandatory convertible notes or silent participations;
• Debt guarantees – formal guarantees provided by governments against default on bank debt.
• Asset purchase/insurance — governments assume part or all the risk of a portfolio of illiquid assets. Transferring the risk from the banks improves liquidity, and can in some cases provide capital relief.

Key findings from the comparisons by country: The cumulative government support provided to financial institutions as a percentage of the 2008 gross domestic product (GDP) ranged from 3.3 percent for Italy to 81.0 percent for the United States and 81.6 percent for the United Kingdom. The total government debt as a percentage of 2008 GDP ranged from 39.4 percent in Spain to 196.3 percent in Japan, with the UK at 51.9 percent and the U.S. at 70.5 percent. (The report notes that the UK statistics for both financial support and total debt likely will be lowered due to a better-than-expected forthcoming report on the Royal Bank of Scotland’s insured assets).

A few country highlights, including amount of government investment since September 2008 (some of which is stretched over years ahead) and impact: (See page 7 in the report for the summary table.)

• United Kingdom — £50 billion for recapitalizations; £250 billion for debt guarantees and £282 billion for asset purchase/insurance. “While government support has ensured the short-term stabilization of banks, the fear among investors and developers is that we will witness a ‘double dip’ rather than a steady recovery; the concern is over a secondary bubble relating to the price of assets, rather than a sign of long term recovery and economic growth.”
• United States — $700 billion for recapitalizations and $1.45 trillion for asset purchase/insurance. “From a microeconomic level, banks will certainly impose more restrictive commercial real estate lending standards on new loan originations. These will include lower leverage ratios, more simple debt structures with fewer multi-tiered financings, and smaller lending syndicates. However, before confidence is fully restored to the real estate market, the greater uncertainties at the macroeconomic level (impact of reduction of federal aid, a possible increase in interest rates) still need to be addressed.”
• Ireland – €77 billion provided through an asset purchase scheme, the National Asset Management Agency (NAMA). “Some investors are skeptical about the ability of NAMA to manage the (high volume) of assets. Overall, however, the scheme has received positive feedback. General opinion is that Ireland will start to recover when the government intervention is reduced and there is a return of the credit markets.”
• Germany – €80 billion for recapitalizations and €400 billion for debt guarantees and asset purchase/insurance. “Banks’ business models are now under long-term scrutiny by the German government and the European Commission. Many German investors believe this is what the industry needs; they predict that the banking industry will need to prepare for further restructuring.”
• Italy – €10 to €12 billion for recapitalizations, plus a tax amnesty scheme. “With its low private debt and implementation of schemes that do not impact greatly on the public debt, Italy’s relative economic situation should remain similar to what it was before the crisis.”
• The Netherlands – €20 billion for recapitalizations; €200 billion for debt guarantees and €27.7 billion to ING for asset purchase/insurance. The European Commission’s action forcing ING to split its banking and insurance businesses and sell the insurance portion reflects a plan to “break down large conglomerates so if another crisis occurs, it will be easier to manage. Investors in The Netherlands believe the next few years are crucial for witnessing this type of action.”
• France – €10.5 billion for recapitalizations and €265 billion for debt guarantees. “It is clear from the interventions employed by the French government that the property industry is not a high priority. The government has agreed to support the refinancing of banks on the condition that banks lend to the corporate sector to ensure the prevention of a financial crisis there, rather than the real estate sector. While many agree there is no imminent real estate crisis in France, they suggest that there is the possibility of one between 2010 and 2014 and their concern is that the government will not be prepared.”
• Spain – €200 billion for debt guarantees and €50 billion for asset purchase/insurance, plus €9 billion for a bank restructuring scheme. “The feeling shared by developers, investors and a majority of the public is that private consumption will support long-term economic recovery, not political measures. The fear is that extremely high public debt due to government intervention will negatively affect private consumption, stunting Spain’s economic recovery.”
• Japan – ¥13 trillion for recapitalizations, plus ¥2 trillion for commercial paper purchases and assets backed by commercial paper. “While funds and new real estate firms have suffered, Japanese-established companies with longer investment horizons are playing the group card in an attempt to hold on until times get better. Japan will muddle its way through the downturn, waiting for the U.S. to turn around.”

Too Big to Fail was published with support from Shearman & Sterling LLP, a leading international law firm with over 900 lawyers providing a wide range of legal services through a network of 20 offices in the world’s major financial centers.

NOTE TO EDITORS AND REPORTERS: Interview requests related to the report should be directed to Trish Riggs at 1-202-624-7086, [email protected].

About the Urban Land Institute:
The Urban Land Institute (uli.org) is a nonprofit education and research institute supported by its members. Its mission is to provide leadership in the responsible use of land and in creating and sustaining thriving communities worldwide. Established in 1936, the Institute has nearly 33,000 members representing all aspects of land use and development disciplines. The ULI Europe office was opened in 2004 in London and is committed to bringing timely and informative programs to all segments of the property community in Europe.